Pacific Gas and Elec. Co. v. Superior Court

• Decision Date: 24 October 2006
• Docket Number: No. C053352.,C053352.
• Citation: 50 Cal.Rptr.3d 199,144 Cal.App.4th 19
• Court: California Court of Appeals Court of Appeals
• Parties: PACIFIC GAS AND ELECTRIC CO., Petitioner, v. The SUPERIOR COURT of San Joaquin County, Respondent; American Guarantee and Liability Insurance Co., Real Party in Interest.

50 Cal.Rptr.3d 199

144 Cal.App.4th 19

PACIFIC GAS AND ELECTRIC CO., Petitioner, v. The SUPERIOR COURT of San Joaquin County, Respondent American Guarantee and Liability Insurance Co., Real Party in Interest.

No. C053352.

Court of Appeal, Third District.

October 24, 2006.

Cassel Malm Fagundes, P. Gary Cassel and W. Jason Scott for Petitioner.

No appearance for Respondent.

Culbreth Schroeder and Eric M. Schroeder for Real Party in Interest.

SIMS, Acting P.J.

Real party in interest American Guarantee and Liability Insurance Company (American) has sued petitioner Pacific Gas and Electric Company (PG & E) in an action for property damages arising from an industrial power failure that injured its insured, Pac-West Telecomm, Inc. (Pac-West). American seeks not only to recover payments it has paid out to Pac-West, but claims it may recover its insured's $50,000 deductible although Pac-West is not a named party in this lawsuit.

The trial court denied PG & E's motion to strike the prayer for recovery of the nonparty's deductible, concluding that regulations governing the obligation of an insurer to seek recovery for an insured's deductible in a subrogation demand confers standing to sue on an insured's behalf. PG & E now seeks a writ of mandate to overturn the trial court's order denying its motion to strike the request for recovery of the deductible. We issued a Palma notice notifying the parties of the possibility that this court may issue a peremptory writ in the first instance, and seeking any opposition to the petition. (See Palma v. U.S. Industrial Fasteners, Inc. (1984) 36 Cal.3d 171, 203 Cal.Rptr. 626, 681 P.2d 893.) We have received opposition and a reply. We conclude that the administrative regulation relied on by American does not authorize it to recover its insured's deductible in litigation. Accordingly, we conclude the trial court abused its discretion in denying the motion to strike, and we shall issue the writ.

FACTUAL AND PROCEDURAL BACKGROUND

American filed a complaint for damages on March 7, 2006, alleging that PG & E was negligent in a variety of areas concerning certain power cables and equipment. A power failure and fire subsequently caused damage to electrical equipment belonging to insured Pac-West. The prayer for damages by American sought reimbursement for $64,657.46 already paid, future payments, and for Pac-West's $50,000 deductible.

PG & E moved to strike the demand for the $50,000 deductible because American did not have standing to seek recovery because Pac-West is not a party to the lawsuit. (Code Civ. Proc., § 436.)¹ American argued that California Code of Regulations, title 10, section 2695.7 (section 2695.7), conferred standing upon it to recover the deductible because it required American to seek recovery as part of its subrogation demand, in order to comply with fair settlement practices.²

The trial court denied the motion to strike, reasoning that section 2695.7 conferred standing on American.

DISCUSSION

I. Standard of Review

A motion to strike a pleading under Code of Civil Procedure section 436 is reviewed for abuse of discretion. (Leader v. Health Industries of America, Inc. (2001) 89 Cal.App.4th 603, 612, 107 Cal. Rptr.2d 489.) "The scope of discretion always resides in the particular law being applied; action that transgresses the confines of the applicable principles of law is outside the scope of discretion and we call such action an abuse of discretion." (Choice-in-Education League v. Los Angeles Unified School Dist. (1993) 17 Cal. App.4th 415, 422, 21 Cal.Rptr.2d 303.)

II. Insurers Do Not Have Standing to Recover an Insured's Unpaid Deductible in a Subrogation Lawsuit

Standing in a lawsuit is governed by Code of Civil Procedure section 367, which provides: "Every action must be prosecuted in the name of the real party in interest, except as otherwise provided by statute."

It is well-settled that, pursuant to principles of equitable subrogation, an insured retains a right to sue for uncompensated loss. "Subrogation is the right of an insurer to take the place of its insured to pursue recovery from legally responsible third parties for losses paid to the insured by the insurer. [Citation.]" (Kardly v. State Farm Mut. Auto. Ins. Co. (1989) 207 Cal.App.3d 479, 488, 255 Cal. Rptr. 40, italics added.) "Both the subrogee (insurer) and the subrogor (insured) have a right of action against the tortfeasor."³ (Basin Construction Corp. v. Department of Water & Power (1988) 199 Cal.App.3d 819, 825, 245 Cal.Rptr. 178.)

Subrogation "can also arise out of the contractual language of the insurance policy (conventional subrogation)." (Progressive West Ins. Co. v. Superior Court (2005) 135 Cal.App.4th 263, 272, 37 Cal. Rptr.3d 434.) However, American has not pled that its insurance policy allows it to recover its insured's deductible, and it makes no such claim in this court.

American claims it became "subrogated to all PAC-WEST's [sic] rights and remedies against all those responsible for this loss." However, it admits that "this loss" is only the $64,657.46 it has actually paid to Pac-West to date, and deducting the $50,000 deductible from the gross claim of $111,657.46. Hence, under the general law of subrogation, American has a right to sue only for its subrogated loss, i.e., what it paid its insured.

III. The California Fair Claims Settlement Practices Regulations Govern the Settlement of Insurance Claims

American premises its entire argument that it has standing to sue for the deductible upon subdivision (q) of section 2695.7. (See fn. 2, ante.) We disagree. As we shall explain, this regulation governs the conduct of insurers in the settlement of claims, not the pursuit of litigation.

"We construe statutes and regulations in a manner that carries out the legislative or regulatory intent. (Trope v. Katz (1995) 11 Cal.4th 274, 280 [45 Cal. Rptr.2d 241, 902 P.2d 259].) We must `"ascertain the intent of the [drafters] so as to effectuate the purpose"' of the regulations. (Moyer v. Workmen's Comp. Appeals Bd. (1973) 10 Cal.3d 222, 230 [110 Cal.Rptr. 144, 514 P.2d 1224].) The words used are the primary source for identifying the drafter's intent. (Ibid.) We give those words their usual and ordinary meaning where possible. (Code Civ. Proc., § 1858; Trope, supra, 11 Cal.4th at p. 280 [45 Cal.Rptr.2d 241, 902 P.2d 259].) We give significance to every word, avoiding an interpretation that renders any word surplusage. (Delaney v. Superior Court (1990) 50 Cal.3d 785, 798-799 [268 Cal. Rptr. 753, 789 P.2d 934].) We also interpret the words of a regulation in context, harmonizing to the extent possible all provisions relating to the same subject matter. (County of Alameda v. Pacific Gas & Electric Co. (1997) 51 Cal.App.4th 1691, 1698 .)" (Simi Corp. v. Garamendi (2003) 109 Cal.App.4th 1496, 1505-1506, 1 Cal.Rptr.3d 207.)

We begin with the regulatory context in which section 2695.7 appears.

Section 2695.7 is part of a larger regulatory scheme designed to curtail unfair business practices in the insurance business enumerated in Insurance Code section 790.03, subdivision (h). Section 2695.7 is a part of article 1 of subchapter 7.5 of title 10 of the California Code of Regulations. The "preamble" to article 1 is found in section 2695.1 of title 10 as follows:

"(a) Section 790.03(h) of the California Insurance Code enumerates sixteen claims settlement practices that, when either knowingly committed on a single occasion, or performed with such frequency as to indicate a general business practice, are considered to be unfair claims settlement practices and are, thus, prohibited by this section of the California Insurance Code. The Insurance Commissioner has promulgated these regulations in order to accomplish the following objectives:

"(1) To delineate certain minimum standards for the settlement of claims which, when violated knowingly on a single occasion or performed with such frequency as to indicate a general business practice shall constitute an unfair claims settlement practice within the meaning of Insurance Code Section 790.03(h);

"(2) To promote the good faith, prompt, efficient and equitable settlement of claims on a cost effective basis;

"(3) To discourage and monitor the presentation to insurers of false or fraudulent claims; and,

"(4) To encourage the prompt and thorough investigation of suspected fraudulent claims and ensure the prompt and comprehensive reporting of suspected fraudulent claims as required by Insurance Code Section 1872.4." (§ 2695.7, italics added.)

This "preamble" leaves no doubt that the regulations to which it refers (including section 2695.7) concern the settlement of claims, not the pursuit of claims in litigation. This conclusion is bolstered by a reading of section 2695.7 in its entirety.⁴ Section 2695.7 is entitled, "Standards for Prompt, Fair and Equitable Settlements." (Italics added.) The numerous references in section 2695.7 to the settlement of claims (see appendix, post) leave no doubt that the aim of section 2695.7 is to govern the settlement of claims, not the pursuit of litigation.

American focuses on the use of the term "subrogation demand" in section 2695.7, subdivision (q). Contrary to American's argument, the plain meaning of the term "subrogation demand" in this administrative regulation does not contradict standing and subrogation law. It addresses another subject entirely—the settlement of claims and the pursuit of a subrogation claim short of litigation. Thus, in ordinary parlance, a "demand" is something that occurs short of litigation. Indeed, it is the refusal of a "demand" that may trigger litigation. The plain meaning of this phrase in context is that an insurer seeking settlement from a tortfeasor must seek recovery of its insured's deductible. However, a "subrogation demand" in a settlement context is not the same as standing to sue in litigation. A "subrogation demand" does not authorize substitution of...